If Bitcoin is Such a Revolutionary Virtual Currency, How Come Few Apparently Use it As, You Know, Currency?

Bitcoin keeps getting written about as a revolutionary virtual currency (as on TechCrunch here, and CNN here, and also GigaOM here, and that's only a small sample of coverage from this week alone), and all this attention makes me feel like I'm eating crazy pills. Because here's the thing: Far as I can tell, hardly anyone is actually using Bitcoin to buy and sell goods and services. That was true three years ago, and to the best of my knowledge, despite constant media coverage, is still true now.

Here's what I mean. Take a look at this chart captured below, first sent to me by a number of Bitcoin advocates when I noted its paltry usage early last year:

So currently, there's less than 70,000 Bitcoin transactions a day, which suggests little absolute growth from last April, when there were around 64,000 transactions. Even assuming each transaction represents a single user, that's a tiny, economically meaningless number. Or to put it another way:

There are probably more people using Linden Dollars in Second Life than there are people using Bitcoin in the entire world. Second Life has about 400,000 users who regularly spend Linden Dollars, insiders tell me, and that's years after the hype wave over Second Life has long since died down. And despite Bitcoin now enjoying its own hype wave, actual users remain, as Clay Shirky once described SL usage, a rounding error. I'm not Paul Krugman (who also thinks Bitcoin hype is overblown) but I know enough about economics to confidently say a currency is valuable only inasmuch as it's regularly and frequently accepted as tender for goods and serves in a diverse, sufficiently large economy. And Bitcoin doesn't yet even pass that basic, fundamental test.

Now, it's quite possible I'm missing an important data source, and if so, I'll happily amend and update this post. But as of now, this question of mine remains unanswered: How can any of Bitcoin's potentially revolutionary uses be meaningful if few people actually use it?

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Comments

[Edmund in Tokyo]

What's really striking about this is that the growth in valuation from the $5-$10 range to $500-$1000 isn't even remotely backed by an increase in transactions on the blockchain.

The speculative activity has made things worse, because at the moment (this will get fixed) the client software defaults tend to lag the exchange rate changes, resulting in temporarily quite expensive transactions.

[Pussycat Catnap]

Bitcoin! Cause we know how to launder your drug money better than anyone else.

... Maybe not the best advertising campaign ...

[Baldtraveller]

Sounds to me that a bitcoin vending system in SL might be an idea. I know I would use it both as a consumer and a merchant. Then again maybe I should start a Virtual exchange in SL. Hmmm....both?

[Silk Road]

Were bitcoins transactions on silkroad also taken into account for this data? That was the only reason I saw bitcoin having any real purpose, and with the silk road down it really lacks any purpose.

[zzpearlbottom]

Cat the only currency a drug dealer trusts is the old Uncle Sam one!

Tired of seeing always the same arguments against Bitcoin!

[Edmund Edgar]

Silk Road: No, IIUC most of the transactions on Silk Road would have happened "off-chain" - you'd deposit your money there and buy whatever you wanted to buy, so you'd only see a transaction on the block-chain when you put money in or took it out, rather than every time you bought something from your balance. There are quite a few other services that work like that (legal as well as illegal) and Wagner isn't counting them.

On the other side of the coin, a certain amount of the transactions that he is counting will be people moving money from one piece of wallet software to another, rather than actual payments from one person to another.

The other angle to this that Wagner isn't addressing is the size of each payment, which is presumably much, much bigger for Bitcoin than it is for SL. But it's quite hard to tell what that is from the Bitcoin transaction data, firstly because of the issue with money moving between different software owned by the same person, and secondly because a transaction usually comprises both the actual payment and the change from the payment, and it's difficult (by design) to tell which is which.

[Muggles]

Very interesting post and even more interesting comments.

A lot of people like to talk about bitcoin to surf the bitcoin media hype without actually putting research into what it is.

[Namecoiner]

Bitcoin is monetary freedom.
Namecoin is informational freedom.
With Namecoin you can registrate uncensored .bit domains and much more.

[Ciaran Laval]

Bitcoin is currently more akin to Gold than a currency in modern terms. The wildly fluctuating value of them makes them too unwieldy for widespread payment methods.

The Linden Dollar is tied to the US Dollar and has been stable for years now, with one or two exceptions when Supply Linden may have been asleep at the wheel. That makes it easier for merchants to value when setting prices.

Your linked post hits the nail on the head with the following quote from Paul Krugman:

"What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin."

Those transactions don't just need to be facilitated, what people need in terms of microtransactions are lower fees. Bitcoin can deliver those lower fees but the fluctuation of its value makes it a difficult currency to work with as a merchant.

Linden Dollars of course aren't a currency, they're a license to use and have no value outside of Second Life, you can't spend Linden Dollars in Cloud Party.

[Pussycat Catnap]

@ZZ: Ok...

How about hiding your network of child-XXX trafficking money?

Bitcoin has had scandals on both of those. Because it is perfect for trafficking such money.

If I were to engage in trafficking money for terrorists, pedos, drug dealers, blood diamonds, and so on... You can bet I would LOVE Bitcoin.
- As all the folks in those fields do.

Untraceable international money... perfect for them.

On a recent interview I think on NPR, the host was speaking to an investment adviser (forget exactly) and noted that "Investors must be worried that the government wants to start regulating this."

The adviser guy was quick to jump back with "no, they want it regulated, and fast... its just too unpredictable and tainted otherwise. When you're moving big money around - predictable is a lot more important than any taxes or regulations. And regulation brings predictable stability."

Legit investors want it regulated so they can plan around it.

Only the underground economies thrive when the lights are off.

[iisingh]

Pork is such a sweet meat

[Baldtraveller]

If we could just get Tony Stark to help promote bitcoin. That would be awesome... Oh wait...http://www.cnbc.com/id/101220710 That and I wonder what Ernest Cline thinks about bitcoin.

[Domchi Underwood]

Hamlet, this is by design, you don't introduce new currency and have everyone using it the next day. First it's gold 2.0, then it's a payment system, and only then can widespread adoption happen.

1 is obviously done; after three so called "bubbles", each surpassing the last, it's proven that it's not a passing fad.

2 is on track: http://imgur.com/asMMvxK - more volume than Western Union since last week.

3 is also well en route. Check https://en.bitcoin.it/wiki/Trade and http://www.coinmap.org/ - quite a few merchants are accepting it already and adoption is increasing daily.

[Emperor Norton]

Pussycat Catnap @ "in trafficking money for terrorists, pedos, drug dealers, blood diamonds, and so on."

And who labels these these job creating free market entrepreneurs "terrorists, drug dealers and sex slaver"? The statist looters. The facts is it is only the care bear government that makes it illegal to kidnap a school bus full of preteens and sell them to be used as prostitutes.